International
Trade
Appleyard / Field / Cobb
Sixth Edition
Brief Contents
• Chapter 1
The world of International Economics
• PART 1 THE CLASSICAL THEORY OF
TRADE
• Chapter 2
Early Trade Theories: Mercantilism and
the Transition to the Classical World of
David Ricardo
• Chapter 3
The Classical World of David Ricardo and
Comparative Advantage
• Chapter 4
Extensions and Tests of the
Classical Model of Trade
• PART 2 NEOCLASSICAL TRADE
THEORY
• Chapter 5
Introduction to Neoclassical Trade
Theory: Tools to Be Employed
• Chapter 6
Gains from Trade in Neoclassical
Theory
• Chapter 7
Offer Curves and the Terms of
Trade
• Chapter 8
The Basis for Trade: Factor
Endowments and the HeckscherOhlin Model
• Chapter 9
Empirical Tests of the Factor
Endowments Approach
• PART 3
ADDITIONAL THEORIES
AND EXTENSIONS
• Chapter 10
Post-Heckscher-Olin Theories of
Trade and Intra-Industry Trade
• Chapter 11
Economic Growth and International
Trade
• Chapter 12
International Factor Movements
• PART 4 TRADE POLICY
• Chapter 13
The Instruments of Trade Policy
• Chapter 14
The Impact of Trade Policies
• Chapter 15
Arguments for Interventionist
Trade Policies
• Chapter 16
Political Economy and U.S. Trade
Policy
• Chapter 17
Economic Integration
• Chapter 18
International Trade and the
Developing Countries
The World of
International Economics
Chapter 1
Introduction
• Welcome to the study of
international trade!
You will be studying one of the oldest
branches of economics.
The study of international economics
concerns decision making with respect
to the use of scarce resources to meet
desired economics objectives.
The Nature of Merchandise Trade
•
Throughout the past four decades,
international trade volume has, on
average, outgrown production.
1. The Geographical composition of
Trade;
 The industrialized countries dominate
world trade.
2. The Commodity Composition of
Trade;
 Among the 2005 commodity
composition of world trade,
manufactures account for 72% percent
of trade, with the remaining amount
consisting of primary prodects.
• 3.U.S. International Trade
Canada is the most important trading
partner, both in exports and imports;
Agricultural products are an important
source of exports;
The capital goods category is the
largest single export category;
Industrial supplies is also an important
export category.
World Trade In Services
• In 2005, the trade in services
estimated to be more than $2
trillion.
International trade in services broadly
consists of commercial services,
investment income, and government
services.
International services trade is also
concentrated among the industrial
countries.
The Changing Degree of
Economic Interdependence
• It is important to recognize both
the large absolute level of
international trade and the relative
importance of trade has been
growing for nearly every country
and for all countries as a group.
Early Trade Theories:
Mercantilism and the
Transition to the Classical
World of David Ricardo
Chapter 2
Introduction
• The Oracle in the 21st Century
Diligence and intelligence are
strategies for improving one’s lot in life.
Do what you do best. Trade for the
rest.
It has long been perceived that
nations benefit in some way by trading
with other nations.
Mercantilism
Mercantilism refers to the collection of
economic thought that came into
existence in Europe during the period
from 1500 to 1700.
Mercantilism is often referred to as the
political economy of state building.
• 1.The Mercantilist Economic
System
Central to Mercantilist thinking was the
view that national wealth was reflected
in a country’s holdings of precious
metals.
Economic activity is viewed as a zerosum game in which one country’s
economics gain was at the expense of
another.
• 2.The Role of Government
Controlling the use and exchange of
precious metals.
Maximizing the likelihood of a positive
trade balance and the inflow of specie.
• 3.Mercantilism and Domestic
Economic Policy.
Controlling of industry and labor.
Pursuing the policies that kept wages
low.
The Challenge to Mercantilism by
Early Classical Writers
• 1. David Hume-The Price-Specie-
Flow Mechanism
A nation could continue to accumulate
specie without any repercussions to its
international competitive position.
The accumulation of gold by means f a
trade surplus would lead to an increase
in the money supply and therefore to
an increase in prices and wages.
The increase would reduce the
competitiveness of the country.
• 2. Adam Smith and the Invisible
Hand
Laissez faire: Allowing individuals to
pursue their own activities within the
bounds of law and order and respect
for property rights.
Countries should specialize in and
export those commodities in which they
had an absolute advantage and should
import those commodities in which the
trading partner had an absolute
advantage.
Learning Objectives
• To learn the basic concepts and
policies associated with
Mercantilism;
• To understand Hume’s pricespecie-flow mechanism and the
challenge it posed to Mercantilism;
• To grasp Adam Smith’s concept of
wealth and absolute advantage as
foundations for international trade.
The Classical World of David
Ricardo and Comparative
Advantage
Chapter 3
Introduction
• Some Common Myths
We hear that trade makes us poorer.
We hear that exporters are good
because they support a country’s
industry, but imports are bad because
they steal business from domestic
producers.
The underlying basis for these words is
comparative advantage.
• Assumptions of the Basic Ricardian
Model
There are 11 assumptions.
• Ricardian Comparative Advantage
Ricardo presented a case describing
the production of two commodities,
wine and cloth, in England and Purtugal.
Comparative Advantage and the
Total Gains From Trade
The essence of Ricardo’s argument is
that international trade does not
require different absolute advantage
and that it is possible and desirable to
trade when comparative advantage
exist.
• 1. Resource Constraints
To demonstrate the total gains from
trade between these two countries, it is
necessary to first establish the amount
of the constraining resource-laboravailable to each country.
 Suppose that country A has 9,000
labor hours available and country B
has 16,000 labor hours available.
 Examining the equivalent quantity of
domestic labor services consumed
before and after trade for each
country.
 After trade, country A consumes
3,500C and 2,000W. Country A has
gained the equivalent of 500 labor
hours.
After trade, country B consumes
5,500C and 1,500W. Country B has
gained the equivalent of 1,000 labor
hours.
• 2. Complete Specialization
Complete Specialization: All resources
are devoted to the production of one
good, with no production of the other
good.
Country A producing only cloth and
country B producing only wine, they
exchange 2,000 barrels of wine for
5,000 yards of cloth.
A would gain 10,000 hours, which is
greater than the labor value of
consumption in either autarky or in the
case of trade with no production
change.
Country B is also better off because it
now consumes 5,000 yards of cloth and
2,000 barrels of wine with a labor value
of 18,000 hours.
Representing the Ricardian Model with
Production-Possibilities Frontiers
The PPF reflects all combinations of
two products that a country can
produce at a given point in time given
its resource base, level of technology,
full utilization of resources, and
economically efficient production.
• 1. Production Possibilities-An
Example
The figures on labor hours and
production for country A and B make
it possible to display the productionpossibilities frontiers for each country.
With the initiation of trade, country A
was able to produce a new, flatter
consumption-possibilities frontier with
trade.
Country A can now choose to consume
a combination of goods that clearly lies
outside its own PPF in autarky, thus
demonstrating the potential gains from
trade.
The situation is similar for country B.
• Maximum Gains from Trade
In the Classical model, production
generally takes place at an end point of
the PPF of each country.
Our procedure showed that trade
could benefit a country even if all of its
resources were “frozen” into their
existing production patterns.
There is no reason to stop for
producers at any point on the PPF until
the maximum amount of production is
reached.
• Comparative advantage-some
concluding observations
Up to this point, nothing has been said
about the basis for the comparative
advantages tat a country might have in
trade.
The Classical economists thought that
participation in foreign trade could be a
strong positive force for development.
Specialization in the production of
goods that have few links to the rest of
the economy can lead to a lopsided
pattern of growth.
The Classical writers have made us
aware that trade not only produces
static gains but also can be a positive
vehicle for economic growth and
development and that it should be
encouraged.
Learning Objectives
• To understand comparative advantage as
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a basis for trade between countries;
To identify the difference between
comparative advantage and absolute
advantage;
To quantify the gains from trade in a
two-country, two-good model;
To recognize comparative advantage and
the potential gains from trade using
production-possibilities frontiers.
Extensions and Tests of the
Classical Model of Trade
Chapter 4
Introduction
• Trade Complexities in the Real
World
In light of ongoing structural changes
taking place in the increasingly
integrated trading world and changes in
demand for certain kinds of labor,
international competitiveness of certain
key regional industries has taken
center stage in the current political
arena, and the effect of reduced trade
barriers is often cited as the cause of
these industry problems.
The Classical Model in Money
Terms
The first extension of the Classical
model changes the example from one
of labor requirements per commodity
to a monetary value of the commodity.
One the exchange rate is established,
the value of all goods an be stated in
term of one currency.
Assume that the fixed exchange rate is
1 escudo(esc)=£1.
The pattern of trade now responds to
money-price differences.
The result of trade is the same as that
reached in the examination of relative
labor efficiency between the two
countries.
• Wage Rate Limits and Exchange
Rate Limits
Wage rate limits: The endpoints of the
range within which the wage can vary
without eliminating the basis for trade.
Similarly, there are exchange rate
limits.
The export condition indicates when a
country has a cost advantage in a
particular product, that condition can
be used to determine the wage that will
cause prices to be the same in the two
countries.
Multiple Commodities
• 1. The Effect of Wage Rate Changes
Expanding the number of commodities
is a useful extension of the basic
Classical model because it permits an
analysis of the effects of exogenous
changes in relative wages or the
exchange rate on the pattern of trade.
2. The Effect of Exchange Rate
Changes
Changes in the exchange rate also
alter a country’s trade pattern.
A shift in tastes and preferences
toward foreign goods, which leads to
an increase in the domestic price of
foreign currency, will make domestic
products cheaper when measured in
that foreign currency, thereby
increasing the competitiveness of a
country in terms of exports.
The equilibrium terms of trade will
reflect the size and elasticity of demand
of each country for each other’s
products, given the initial production
conditions determined by the resource
endowments and technology.
• Transportation Costs
The incorporation of transport costs
alters the results covered to this point,
because the cost of moving a product
from one country’s location to another
affects relative prices.
• Multiple Countries
When several countries are taken into
account, the specification of the trade
pattern is less straightforward.
• Evaluating the Classical Model
Although the Classical model seems
limited in today’s complex production
world, economists have been interested
in the extent to which its general
conclusions are realized in international
trade
Learning Objectives
• To grasp how wages, productivity,
and exchange rates affect
comparative advantage and
international trade patterns;
• To understand the implications of
extending the basic model of
comparative advantage to more
than two countries and/or
commodities;
• To make the reader aware that
real-world trade patterns are
consistent with underlying
comparative advantage.
Introduction to Neoclassical
Trade Theory: Tools to Be
Employed
Chapter 5
Introduction
This chapter presents basic
microeconomics concepts and
relationships employed in analyzing
trade patterns and the gains from
trade.
The Theory of Consumer Behavior
• 1. Consumer Indifference Curves
Traditional microeconomic theory
begins the analysis of individual
consumer decisions through the use of
the consumer indifference curve.
Cardinal utility and ordinal utility.
Transitivity means that if a bundle of
goods B is preferred (or equal) to a
bundle of goods A and if a bundle of
goods C is preferred (or equal) to a
bundle of goods B, then bundle C must
be preferred (or equal) to bundle A.
An indifference curve must be
downward sloping because less of one
good must be compensated with more
of the other good to maintain the same
satisfaction level.
Diminishing marginal rate of
substitution.
An indifference curve can not intersect
for the individual consumer.
• 2. The Budget Constraint;
To determine actual consumption on
the individual consumer’s indifference
curve, we need to examine the income
level of the consumer.
The income level is represented by the
budget constraint or budget line.
• 3. Consumer Equilibrium
The objective of the consumer is to
maximize satisfaction, subject to the
income constraint.
The individual indifference curves
show levels of satisfaction, and the
budget line indicates the income
constraint, the consumer maximizes
satisfaction when the budget line just
touches the highest indifference curve
attainable.
Production Theory
• 1. Isoquants
An isoquant is the concept that relates
output to the factor inputs.
An isoquant shows the various
combinations of the two inputs that
produces the same level of output.
The exact shape of an isoquant
reflects the subsitution possibilities
between capital and labor in the
production process.
 A major feature of isoquants is that
tey have cardinal properties rather than
simply ordinal properties.
The negative of the slope of the
isoquant at any point is equal to the
ratio of the marginal productivities of
the factors of production.
The ratio of marginal productivities is
often referred to as the marginal rate
of technical substitution.
• 2. Isocost Lines
An isocost line shows the various
combinations of the factors of
production that can be purchased by
the firm for a given total cost at given
input prices.
The negative of the slope of a isocost
is equal to the ratio of the wage rate to
the rental rate on capital.
• 3. Producer Equilibrium.
The choice of the combination of
factors of production to employ
involves consideration of factor prices
and technical factor requirement.
At the equilibrium point the isoquant is
tangent to the isocost, and the firm is
obtaining the maximum output for the
given cost.
The Edgeworth Box Diagram and the
Production-Possibilities Frontier
• 1. The Edgeworth Box Diagram
Construction of a typical Edageworth
box diagram begins by considering
firms in two separate industries,
industry X and industry Y.
Draw the isoquants for firms in
industry X, and draw the isoquants for
firms in industry Y.
The relative factor prices (w/r)1 facing
the two industries will be identical.
The Edgworth box diagram takes the
isoquants of these two industries and
puts them into one diagram.
Production efficiency locus.
• 2. The Production-Possibilities
Frontier
Unlike the PPF used by the Classical
economists, this PPF demonstrates
increasing opportunity cost.
With increasing opportunity costs, the
shape of the PPF is thus concave to the
origin or bowed out.
Marginal rate of transformation, which
reflects the change in Y (ΔY) associated
with a change in X (ΔX).
The negative slope or –(ΔY/ ΔX) is a
positive number.
Learning Objectives
• To review the microeconomic
principles of consumer and
producer behavior;
• To understand the concept and
limitations of a community
indifference curve;
• To recognize the underlying basis
for a production-possibilities
frontier with increasing
opportunity costs.
Gains from Trade in
Neoclassical Theory
Chapter 6
Introduction
In this chapter we use the
microeconomics tools developed in
Chapter 5 to present the basic case for
participating in trade and thus for
avoiding these welfare costs of trade
restrictions.
This case includes increasing
opportunity costs, factors of production
besides labor, and explicit demand
considerations.
Autarky Equilibrium
Autarky means total absence of
participation in international trade.
The economy is assumed to be
seeking to maximize its well-being
through the behavior of its economic
agents.
In autarky, as in trade, production
takes place on the PPF.
The equilibrium is at the point where
the PPF is tangent to the price line for
the two goods.
Introduction of International
Trade
Suppose international trade
opportunities are introduced into theis
autarkic situation.
Trade Triangle.
• 1. The Consumption and Production
Gains from Trade
Economists sometimes divide the total
gains from trade into two conceptually
distinct parts: the consumption gain
and the production gain.
The consumption gain from trade
refers to the fact that the exposure to
new relative prices, even without
changes in production, enhances the
welfare of the country.
Moving production toward the
comparative-advantage good thus
increases welfare.
•
• 2. Trade in the Partner Country.
Because of the relative prices available
through international trade, producers
in the partner country have an
incentive to produce more of good Y
and less of the X good since partner
country has a comparative advantage
in good Y.
With trade, the partner country’s
consumers are able to reach a higher
indifference curve.
Minimum Conditions for Trade
• 1. Trade Between Countries with
Identical PPFs
According to the neoclassical theory,
two countries with identical production
conditions can benefit from trade.
Different demand conditions in the two
countries and the presence of
increasing opportunity costs are the
two principal conditions.
2. Trade Between Countries with
Identical Demand Condition
Production conditions may differ
because different technologies are
employed in two countries with the
same relative amounts of the two
factors, capital and labor.
Country I, which is more efficient in
producing good X, will find itself
producing and consuming more of this
product in autarky. Similarly, country II
produces more good Y.
Country I will export good X and
import good Y at terms of trade that
are between the two autarky price
ratios, and it will increases production
of good X and decrease production of
good Y.
Each country can then attain a higher
indifference curve.
Some Important Assumptions in
the Analysis
 This section briefly discusses three
important assumptions used in the
previous analysis that may need to be
taken into account when examining the
“real world”.
• 1. Costless Factor Mobility
One important assumption is that
factors of production can shift readily
and without cost along the PPF as
relative prices change and trade
opportunities present themselves.
•
2. Full Employment of Factors of
Production
This assumption is related to the
problem of adjustment.
All of a country’s factors of production
are fully employed.
The country is operating on the PPF.
•
3. The Indifference Curve Map Can
Show Welfare Changes
If intersections of community
indifference curves occur, there might
be a problem in interpreting welfare
changes when a country moves from
autarky to trade.
We cannot be sure that the direction of
the actual welfare can be meaningfully
ascertained.
Learning Objectives
• To understand economic equilibrium in a
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country that has no trade;
To grasp the welfare-enhancing impact
of opening a country to international
trade;
To realize that either supply differences
or demand differences between countries
are sufficient to generate a basis for
trade
To appreciate the implications of key
assumptions in the neoclassical trade
model.
Offer Curves and the
Terms of Trade
Chapter 7
Introduction
• Terms-of-Trade Shocks
This chapter introduces and explains
the factors that determined the terms
of trade or posttrade prices.
An important simplification was made:
World prices with trade were assumed
to be at a certain level.
An important analytical concept
employed to explain the determination
of the terms of trade is known as the
offer curve.
A Country’s Offer Curve
The offer curve or reciprocal demand
curve of a country indicates the
quantity of imports and exports the
country is willing to buy and sell on
world markets at all possible relative
prices.
The offer curve is a combination of a
demand curve and a supply curve.
The most useful feature of the offer
curve diagram is that it can bring two
trading countries together in one
diagram.
Trading Equilibrium
With the two countries’ offer curves
brought together in one figure, we can
indicate the trading equilibrium and
show the equilibrium terms of trade.
The equilibrium point E occurs at the
intersection of the two offer curves.
At point E, the quantity of exports that
country I wishes to sell exactly equals
the quantity of imports that country II
wishes to buy. Similar to country I.
Shifts of Offer Curves
The shift is analogous to an “increase
in demand” in the ordinary demandsupply diagram.
An increased willingness to trade in
the offer curve analysis means that, at
each possible terms of trade, the
country is willing to supply more
exports and demand more imports.
Similarly, a decrease in willingness to
trade or a decrease in reciprocal
demand is indicated by a shifted offer
curve which pivoted inward to the left.
Elasticity and the Offer Curve
The shape can be discussed in terms
of the general concept of elasticity.
Five types of offer curve based on
different elasticity of demand.
• Other Concepts of the Terms of
Trade
Income terms of trade: The
commodity terms of trade multiplied by
a quantity index of export.
Single Factoral Terms of Trade: The
commodity terms of trade multiplied by
an index of productivity in the export
industries.
• Double factoral terms of trade
Double factoral terms of trade ratio is
the single factoral terms of trade
divided by the index of productivity in
the export industries of the trading
partners.
Learning Objectives
• To understand a country’s offer curve
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and how it is obtained;
To learn how the equilibrium
international terms of trade are attained;
To identify and determine how changes
in both supply and demand conditions
influence a country’s international terms
of trade and volume of trade
To appreciate the usefulness of different
concepts of the terms of trade.
The Basis for Trade: Factor
Endowments and the
Heckscher-Ohlin Model
Chapter 8
Introduction
• Do Labor Standards Affect
Comparative Advantage?
This chapter will examine in greater
detail the factors that influence relative
prices prior to the international trade,
focusing on differences in supply
and/or demand conditions in the two
countries.
Supply, Demand, and Autarky
Prices
The source of differences in pretrade
price ratios between countries lies in
the interaction of aggregate supply and
demand as represented by their
respective production-possibilities
frontiers and community indifference
curves.
Differences in either demand or supply
conditions are sufficient to provide a
basis for trade between two counties.
Factor Endowments and the
Heckscher-Ohlin Theorem
• 1. Factor Abundance and
Heckscher-Ohlin
Different factor endowments refers to
different relative factor endowments,
not different absolute amounts.
Relative factor abundance may be
defined in two ways: the physical
definition and the price definition.
The physical definition explains factor
abundance in terms of the physical
units of two factors.
The price definition relies on the
relative prices of capital and labor to
determine the type of factor abundance
characterizing the two countries.
One definition focuses on physical
availability, and the other focuses on
factor price.
• Commodity Factor Intensity and
Heckscher-Ohlin
A commodity is said to be factor-xintensive whenever the ratio of factor x
to a second factor y is larger when
compared with a similar ratio of factor
usage of a second commodity.
• The Heckscher-Ohlin Theorem
The set of assumptions about
production leads to the conclusion that
the production possibilities frontier will
differ between two countries solely as a
result of their differing factor
endowments.
Combine these two differently shaped
PPF with the same set of tastes and
preferences, two different sets of
relative prices will emerge in autarky.
The international terms of trade must
lie necessarily between the two internal
price ratios.
Heckscher-Ohlin Theorem: A country
will export the commodity that uses
relatively intensively abundant factor of
production, and it will import the good
that uses relatively intensively its
relatively scarce factor of production.
• The Factor Price Equalization
Theorem
 As trade takes place between two
countries, prices adjust until both
countries face the same set of relative
prices.
Factor Price Equalization Theorem: In
equilibrium, with both countries facing
the same relative (and absolute)
product prices, with both having the
same technology, and with constant
returns to scale, relative (and absolute)
costs will be equalized. The only way
this can happen is if, in fact, factor
prices are equalized.
• The Stolper-Samuelson Theorem and
Income Distribution Effects of Trade in
the Hechscher-Ohlin Model
With full employment both before and after
trade takes place, the increase in the price of
the abundant factor and the fall in the price of
the scarce factor because of trade imply that
the owners of the abundant factor will find
their real incomes rising and the owners of
the scarce factor will find their real incomes
falling.
Theoretical Qualifications To
Heckscher-Ohlin
• Demand Reversal;
• Factor-Intensity Reversal;
• Transportation Costs;
• Imperfect Competition;
• Immobile or Commodity-Specific
Factors;
• Other Considerations.
Learning Objectives
• To understand how relative factor
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endowments affect relative factor prices;
To recognize how different relative factor
prices generate a basis for trade;
To learn how trade affects relative factor
prices and income distribution;
To understand how real-world
phenomena can modify Heckscher-Ohlin
conclusions.
Empirical Tests of the Factor
Endowments Approach
Chapter 9
Introduction
• Theories, Assumptions, and the
Role of Empirical Work
This chapter will follow the second
approach by examining the empirical
tests of Heckscher-Ohlin predictions in
an attempt to find which of the often
strict assumptions are crucial.
• The Leontief Paradox
In 1953, Leontief made use of his own
invention-an input-output table-to test
the H-O prediction.
Leontief found that the most important
export industries tended to have lower
K/L ratios and higher labor
requirements and lower capital
requirements per dollar of output than
did the most important import
competing industries.
Suggested Explanations for the
Leontief Paradox
• 1. Demand Reversal
In demand reversal, demand patterns
across trading partners differ to such
an extant that trade does not follow the
H-O pattern when the physical
definition of relative factor abundance
is used.
The validity of demand reversal as an
explanation of the Leontief paradox is
an empirical question.
• Factor-Intensity Reversal
Factor-intensity reversal(FIR) occurs
when a good is produced in one
country by relatively capital-intensive
methods but is produced in another
country by relatively labor-intensive
methods.
• U.S. Tariff Structure
This explanation for the Leontief
paradox focuses on the factor intensity
of the goods that primarily receive
tariff (and other trade barrier)
protection in the United States.
In the United States, labor will be
more protectionist than will owners of
capital. Therefore, U.S. trade barriers
tend to hit hardest the imports of
relatively labor-intensive goods.
The composition of the U.S. import
bundle is relatively more capital
intensive .
• Different Skill Levels of Labor
In this explanation of the Leontief paradox,
the basic point is that the use of “labor” as a
factor of production may involve a category
that is too aggregative, because there are
many different kinds and qualities of labor.
Donald Keesing (1966) found that U.S.
exports embodied a higher proportion of
category I workers (scientists and engineers)
and largest fraction of category VIII workers
(unskilled and semiskilled workers).
• The Role of Natural Resources
This explanation also builds around the
notion that a two-factor test is too
restrictive for proper assessment of the
empirical validity of the H-O Theorem.
In the context of the Leontief paradox,
many of the import-competing goods
labeled as “capital intensive” were
really “natural resource intensive”.
Other Tests of the HeckscherOhlin Theorem
• Factor Content Approach with Many
Factors
• Comparisons of Calculated and
Actual Abundances;
• Productivity Differences and
“Home Bias”.
• Heckscher-Ohlin and Income
Inequality
Learning Objectives
• To learn about the failure of U.S.
trade patterns to conform to
Heckscher-Ohlin predictions;
• To understand possible
explanations for the U.S. trade
paradox;
• To become acquainted with issues
arising from Heckscher-Ohlin tests;
• To grasp the role of trade in
generating growing income
inequality in developed countries.
Part 3
Additional Theories
And Extensions
Post-Heckscher-Ohlin
theories of trade and
intra-industry trade
Chapter 10
Learning objectives
1
Explanations for the basis of trade in
manufactures beyond Heckscher-Ohlin
2
The roles of technology dissemination,
demand patterns, and time in affecting
trade
3
How the presence of imperfect
competition can affect trade
4
Intra-industry trade phenomenon
Post-Heckscher-Ohlin theories of trade
The imitation lag hypothesis
Two adjustment lags:
• The imitation lag: the length of time that
elapses between the product’s introduction in
country Ⅰ and the appearance of the version
produced by firms in country Ⅱ.
• The demand lag: the length of time
between the product’s appearance in country
Ⅰ and its acceptance by consumers in
country Ⅱ as a good substitute for the
products they are currently consuming.
• The product cycle theory
• Builds on the imitation lag hypothesis
• A typical “new product”:
1)it will cater to high-income demands
2)it promises, in its production process, to
be labor-saving and capital-using in nature
• Three stages in life cycle
• New product stage
• Maturing-product stage
• Standardized-product stage
• The Linder theory
• Premises:
• Goods A,B,C,D,E,F and G are arrayed in
ascending order of product “quality” or
sophistication.
• Country Ⅰ has a per capita income level
that yields demands for goods A,B,C,D
and E.
• Country Ⅱ has a slightly higher per
capita income level therefore it may
demand and produce goods C,D,E,F and
G.
• Analyze:
• Trade will occur in goods that have
overlapping demand
• Goods C,D,E will be trade between
Country Ⅰ and Country Ⅱ
• Conclusion:
• International trade in manufactured
goods will be more intense between
countries with similar per capita income
levels than between countries with
dissimilar per capita income levels
• Economies of scale
• In a two-country world where the countries
have identical PPFs and demand conditions,
economies of scale is the new reason for
trade.
• The Krugman Model
• Premises:
• This model rests on economies of scale
and monopolistic competition.
• Labor is the only factor of production.
• The scale economies:
L=a+bQ
• Monopolistic competition:
• many firms in the industry and easy entry
and exit.
• zero profit for each firm in the long run.
• product differentiation.
FIGURE Basic Krugman Diagram
P/W
z
P
z’
E
(P/W)1
z
E’
(P/W)2
z’
P
c2
c1
Per capita consumption, c
• More premises:
• Country Ⅰ and country Ⅱ
• Same tastes, technology, and
characteristics of the factors of
production
• Identical in size (not necessary)
• When the two are opened to trade:
• Market size is enlarged;
• economies of scale came come into play
• production costs can be reduced
• All consumer’s well-being is increased
• Other Post-Heckscher-Ohlin theories
• The reciprocal dumping model
• The gravity model
Intra-industry trade (IIT)
• Intra-industry trade:
• A country both export and import items in
the same product classification category.
• inter-industry trade:
• A country’s exports and imports are in
different product classification category.
• Reasons for intra-industry trade
•
•
•
•
•
•
Product differentiation
Transport costs
Dynamic economies of scale
Degree of product aggregation
Differing income distributions in countries
Differing factor endowments and product
variety
The level of a country’s IIT
Greater per
capita income
Greater national
income
Greater
openness
Existence of a
common border
with principal
trading partners
Less distance
from trading
partners
Greater amount
of Intra-industry
trade
Economic growth and
international trade
Chapter 11
Learning objectives
1
The different ways growth can affect
trade
2
How the source of growth affects the
nature of production and trade
3
How growth and trade affect welfare
in the small country
4
How growth in a large country can have
different welfare effects than growth in
a small country
Classifying the trade effects of
economic growth
• Trade effects of production growth
• Premises :
• Small country (France)
• Increasing opportunity costs
• Currently in equilibrium at a given set of
international prices
FIGURE 1 production effects of growth
Electronics
Electronics
Ⅳ
Ⅲ
B
Ⅰ
A
Imports
A
Exports
Wine
(a) France
(b) France
Ⅱ
Wine
• Points beyond point A that fall on the line: a
neutral production effect
• Region Ⅰ: protrade production effect
• Region Ⅱ: ultra-protrade production
effect
• Region Ⅲ: antitrade production effect
• Region Ⅳ: ultra-antitrade production
effect
• Trade effects of consumption growth
• Points lying beyond B on the straight line
passing through point B and the origin of the
original axes: neutral consumption effect
• Region Ⅰ: antitrade consumption effect
• Region Ⅱ: ultra-antitrade consumption
effect
• Region Ⅲ: protrade consumption effect
• Region Ⅳ: ultra-protrade consumption
effect
FIGURE 2 consumption effects of growth
Ⅲ
Ⅳ
Electronics
Ⅰ
B
Ⅱ
Wine
(b) France
Sources of growth and the productionpossibilities frontier
• The effects of technological change
• Assume: two inputs (capital and labor)
• New types of technology: factor neutral;
labor saving; capital saving
Autos
Autos
Commodity-specific
technological change
Food
Commodity-neutral
technological change
Food
Figure 3 the effects of technological change on the PPF
• The effects of factor growth
FIGURE 4 effects of factor growth on the PPF
Cutlery
(K-intensive)
Factor-neutral
growth
Cheese (L-intensive)
(a)
Growth in
capital only
(b)
Growth in
labor only
(c)
Factor growth, trade, and welfare in
the small-country case
• Premises:
• A small country that cannot influence world
prices, which remain constant
• Two factors: labor, capital
• One factor grows and the other remain
fixed
• Analyze:
• What effect does factor growth have on
trade in the small-country case?
• Conclusion:
• Growth in one factor leads to an absolute
expansion in the product that uses that
factor intensively and an absolute
contraction in output of the product that
uses the other factor intensively—
Rybczynski theorem
Growth, trade, and welfare: the largecountry case
• Premises:
• A large that can influence international
prices
• Growth of the abundant factor causes an
ultra-protrade production effect
• Neutral consumption effect
• Growth can result in declining wellbeing in two ways:
• Welfare declined by the deterioration in the
international terms of trade
• Even if capital is the growing abundant
factor and the negative terms-of-trade
effects are sufficiently strong, the country
could be worse off after growth
International Factor
Movements
Chapter 12
Learning objectives
• The different types of foreign
investment and the welfare effects
of capital movements
• The determinants of foreign direct
investment and the associated
costs and benefits
• The motivation for labor migration
and its effects on participating
countries
• The size and importance of
international remittances
International capital movements
through FDI and multinational
corporations
• Foreign investors in China: “good” or “bad”
•
from the Chinese perspective
Good:
• Higher wages for worker
• Tariff revenue collection for state
• Bad:
• Higher wager wage premium for state firms
• Tariff revenue collection is bad for state firms
• High tariff rate is bad for consumer welfare
• Definitions
• Foreign direct investment (FDI)
• Foreign portfolio investment (FPI)
• MNC/MNE/TNC/TNE
• Reasons for international movement
of capital
• Firms will invest abroad in response to large
and rapidly growing markets for their
products
• Developed-country firms will invest overseas
if the recipient country has a high per capita
income
• Foreign firm can secure access to mineral or
raw material deposits
• Tariffs and nontariff barriers in the host
country also can induce an inflow of FDI
• Low relative wages in the host country
• Firms also need to invest abroad for
defensive purposes to protect market share
• Invest abroad as a means of risk
diversification
• Some firm-specific knowledge or assets
that enable the foreign firm to outperform
the host country’s domestic firms
• Analytical effects of international
capital movements
• Assume:
• Only two countries in the world
• Two factors of production—capital and
labor
• Homogeneous good
• Analyze :
MPPK1
MPPK2
MPPK2
MPPK1
C
r1 r2
E
r1’
r2’
r1’
B’
B
K1 K 2
Capital
• Conclusion
• Total output rises country Ⅰ because
additional capital has come into the country
to be used in the production process
• Efficiency of world resource increases
because of the free movement of capital
• World output increases
• Potential benefits and costs of
foreign direct investment to a host
country
• Potential benefits of foreign direct
investment
• Increased wages
• Increased output
• Increased employment
• Increased exports
• Increased tax revenues
• Realization of scale economies
• Provision of technical and managerial
skills and of new technology
• Weakening of power of domestic
monopoly
• Potential costs of foreign direct investment
• Adverse impact on the host country’s
commodity terms of trade
• Transfer pricing
• Decreased domestic saving
• Decreased domestic investment
• Instability in the balance of payments and
the exchange rate
• Loss of control over domestic policy
• Increased unemployment
• Establishment of local monopoly
• Inadequate attention to the development
of local education and skills
• Overview of benefits and costs of foreign
direct investment
• No general assessment
• Performance requirements are often
placed on foreign firms to improve the
ratio of benefits to costs
Labor movements between countries
• Economics effects of labor movement
• Assuming that labor is homogeneous in the
two countries and mobile, should move from
areas of abundance and lower wages to areas
of scarcity and higher wages.
• This movement of labor causes the wage rate
to rise in the area of out-migration and to fall
in the area of in-migration.
• Labor continues to move until the wage rate is
equalized between the two regions.
• Additional considerations pertaining
to international migration
• The new immigrant might transfer some
income back to home country
• The nature of the immigration
Part 4
Trade Policy
The instruments of
trade policy
Chapter 13
Learning objectives
• The different tax instruments
employed to influence imports
• Familiar with policies used to affect
exports
• The problems encountered in
measuring the presence of
protection
• The different nontariff policies
used to restrict trade
Import tariffs
• Specific tariffs
• A specific tariff is am import duty that
assigns a fixed monetary tax per physical
unit of the good imported.
• Ad valorem tariffs
• The ad valorem tariff is levied as a constant
percentage of the monetary value of 1 unit
of the imported good.
• Other features of tariff schedules
• Preferential duties–
 are tariff rates applied to an import
according to its geographical source; a
country that is given preferential treatment
pays a lower tariff.
 Generalized system of preferences (GSP)
• Most-favored-nation treatment (MFN/NTR)
 It represents an element of
nondiscrimination in tariff policy.
• Offshore assembly provisions
Under offshore assembly provisions(OAP),
now referred to as production-sharing
arrangements by the U.S. International Trade
Commission, the tariff rate in practice on a
good is lower than the tariff rate listed in the
tariff schedules.
Despite the consumer benefits, OAP
legislation is controversial.
• Measurement of tariffs
The “height” of tariffs: One measure of
a country’s average tariff rate is the
unweighted-average tariff rate; the
alternative technique is to calculate a
weighted-average tariff rate.
“Nominal” versus “effective” tariff rates
(ERP): The nominal rate is simply the
rate listed in a country’s tariff amount
per unit by the price of the good.
• Export taxes and subsidies
An export tax is levied only on home-
produced goods that are destined for
export and not for home consumption.
An export subsidy, which is really a
negative export tax or a payment to a
firm by the government when a unit of
the good is exported, attempts to
increase the flow of trade of a country.
• Nontariff barriers to free trade
Import Quotas: The import quota
differs from an import tariff in that the
interference with prices that can be
charged on the domestic market for an
imported good is indirect.
“Voluntary” export restraints(VERs): It
originates primarily from political
considerations.
• Government procurement
provisions
In general, these provisions restrict the
purchasing of foreign products by home
government agencies.
• Domestic content provisions
It attempts to reserve some of the
value added and some of the sales of
product components for domestic
suppliers.
• European border taxes
The value-added tax (VAT) common in
Western Europe is what economists call
an “indirect” tax; this tax is passed on
to the buyer of the more finished good;
Under WTO rules, any import coming
into the country must pay the
equivalent tax because it too is
destined for consumption, and both
goods will then be on an equal footing.
• Administrative classification
The point here is straightforward.
Because tariffs on goods coming into a
country differ by type of good, the
actual tax charged can vary according
to the category into which a good is
classified.
• Restrictions on services trade
• Trade-related investment measures
• Additional restrictions
Developing countries facing a need to
conserve on scarce foreign exchange
reserves may resort to generalized
exchange control.
• Additional domestic policies that
affect trade
The impact of trade
policies
Chapter 14
Learning objectives
• How tariffs, quotas, and subsidies
and subsidies affect domestic
markets
• The winners, losers, and net country
welfare effects of protection
• How the effects of protection differ
between large and small countries
• How protection in one market can
affect other markets in the economy
Trade restrictions in a partial equilibrium
setting: the small-country case
• The impact of an import tariff
• Consumer surplus
• Producer surplus
• The impact of an import quota and
a subsidy to import-competing
production
• The import quota
• Subsidy to an import-competing industry
• The impact of export policies
• The impact of an export tax
• The impact of an export quota
• The effects of an export subsidy
Trade restrictions in a partial equilibrium
setting: the large-country case
• Framework for analysis
• Demand for imports schedule
• Supply of exports schedule
• The impact of an import tariff
• The impact of an import quota
• The impact of an export tax
• The impact of an export subsidy
Trade restrictions in a general
equilibrium setting
• Protection in the small-country
case
• Protection in the large-country
case
Other effects protection
• Lead to a reduction in exports of
the tariff-imposing country
• Have an impact on the distribution
of income among the factors of
production
• The effect of protection in certain
industries on total imports may be
less than it appears if only the
change in imports of the protected
goods is examined
ARGUMENTS FOR
INTERVENTIONIST TRADE
POLICIES
CHAPTER 15
Learning objectives
• To understand why trade policy instruments
•
•
•
are often part of broader social policy and
why other policy instruments might be less
costly.
To evaluate the effectives of trade policy in
the presence of market imperfection.
To recognize invalid economic arguments for
protection.
To grasp the role of trade policy in promoting
strategic industries and dynamic comparative
advantage.
174
Introduction
• In principle, most economists at least agree
that trade increase the overall well-being of a
country, it is striking too note how much
individual interests are willing to spend to
reduce international trade.
• Because most economists think in terms of
alternatives and benefits vs costs, our
produce is essentially to ask,” Given the
objective, what are the benefits and costs of a
restrictive trade policy compared with those
another policy?”
175
Trade policy instruments are part of broader
social policy objectives for a nation-1
• Trade taxes as a source of government
revenue
The decision to use trade taxes, as
opposed to other forms of taxation, to fund
government expenditure in this broader social
context turns on issues of tax efficiency and
equity.
• National defense argument for a tariff
The important point to recognize is that it
is not easy to identify which industries are vital
to national defense.
176
Trade policy instruments are part of broader
social policy objectives for a nation-2
• Tariff to improve the balance of trade
This claims that the imposition of the tariff
will reduce imports. Assuming the exports are not
affected, the obvious result is that the balance of
trade improves
• The terms-of-trade argument for
protection
It maintains that national welfare can be
enhanced through a restrictive policy instrument.
.
177
Trade policy instruments are part of broader
social policy objectives for a nation-3
• Tariff to reduce aggregate unemployment
It runs as follows: Given that a country has
unemployment in slack time, the imposition of
tariff in a shift in demand by domestic consumers
from foreign goods to home-produced goods.
• Tariff to increase employment in a
particular industry
It argues that if protection is granted to a
given industry, demand shift from foreign goods to
home-produced goods. This shift in purchase then
bids up the price of home good, inducing domestic
producers to supply a greater quantity.
178
Trade policy instruments are part of broader
social policy objectives for a nation-4
•Tariff to benefit a scare factor of
production
It makes no claim that the country
as a whole benefits from the
protection; it is instead a argument for
protection from the perspective of an
individual factor of production.
179
Trade policy instruments are part of broader
social policy objectives for a nation-5
• Fostering “national pride” in key
industries
Pride in your country can clearly be
thought of as a legitimate social objective.
• Differential protection as a component
of a foreign policy/aid package
This is one that substantially reduces the
barriers of trade with respect to goods coming
in a certain developing countries.
180
Protection to offset market
imperfections-1
• The presence of externalities as an
argument for protection
Choose the policy that gets directly to the
problem.
• Tariff to extract foreign monopoly profit
Due to the tariff, world efficiency and
welfare are reduce .
181
Protection to offset market
imperfections-2
• The use of an export tax to redistribute
profit from a domestic monopolist
The presence of export tax offsets some of
the monopoly leverage of the firm as it drives
the domestic price downward to MC, expanding
domestic consumption and generating
government revenue.
182
Protection as a response to
international policy distortions
• Tariff to offset foreign dumping
1. persistent dumpling
2. intermittent dumpling
3. sporadic dumpling
4. antidumping duty
• Tariff to offset a foreign subsidy
The basic point is that a foreign government
subsidy awarded to a foreign import supplier
constitutes unfair trade with the home country.
183
Miscellaneous, Invalid arguments
• One common argument is that a country
should use protection to reduce imports and
keep the money at home.
• Another argues for protection to “level the
playing field” in the terms of offsetting cheap
foreign labor or other reasons for cost
differences. In the extreme, it is often
referred to as the “scientific tariff”, that is, a
tariff that equalizes products costs among
countries.
184
Strategy trade policy: Fostering
comparative advantage-1
• The infant industry argument for
protection
The infant industry argument rests on the
notion that a particular industry in a country
may posses, for various reasons, a long-run
comparative advantage even though the country
is an importer of the good at the present time.
185
Strategy trade policy: Fostering
comparative advantage-2
• Economies of scale in a duopoly
framework
An important contribution to the strategic
trade policy literature came from economist Paul
Krugman (1984). His intention is to demonstrate
how import protection for one firm leads to an
increase in exports for the protected firm in any
foreign markets in which that firm operates.
186
Strategy trade policy: Fostering
comparative advantage-3
• Research and development and sales of a
home firm
In considering this tariff to promote exports
through R&D, assume again that a duopoly
market structure of a home firm and foreign firm
exits and that the firms are competing in
markets. However, assume that marginal costs
for each firm are constant with respect to output
but that, for any given level of output, marginal
costs depend on investment in R&D．
187
Strategy trade policy: Fostering
comparative advantage-4
• Export subsidy in duopoly
The analysis again assumes a duopoly
context of a home firm and a foreign firm. The
firms are competing for sales in the market of a
third country, that is, in a market that is not the
domestic market of either of the two duopolists;
and it assumes that they do not sell any output
in their own domestic markets.
188
Strategy trade policy: Fostering
comparative advantage-5
• Strategic government interaction and world
welfare
An important result of this forthcoming
analysis is that country governments each can be
maximizing their own country’s well-being, given
the behavior of other governments, and yet would
welfare as a whole is definitely not being
maximized．
189
Strategy trade policy: Fostering
comparative advantage-6
• Concluding observations on strategic trade
policy
It was quickly pointed out that while
competitiveness is relevant for individual firms,
comparative advantage and competition is what is
relevant for countries. Further, it is extremely
difficult to determine which products might have a
potential comparative advantage and hence be the
focus of such strategic trade policy.
190
Summery
• This chapter has presented and
examined many of the most common
arguments for protection.
• Traditional arguments were grouped
into several key categories.
• We also examined several of the
arguments that focus on the dynamic
benefits of protection.
191
POLITICAL ECONOMY AND
U.S. TRADE POLICY
CHAPTER 16
Learning objectives
• To comprehend several basic concepts
of the political economic policy.
• To understand critical development in
the history of multilateral trade
negotiations.
• To become familiar with recent trade
policy issues.
• To increase awareness of ongoing U.S.
trade policy developments.
193
Introduction
• Trade policy can involve conflicting and
complex economic and political forces,
and outcomes are not so clear cut as
traditional trade theory would suggest.
• This chapter first addresses how the
setting of the trade policy is influenced
by the institutions and the political
process and then summarize U.S. and
multilateral trade policy developments
during the last several years.
194
The political economy of trade policy-1
• The self-interest approach to trade policy
In this approach, government decision makers are
essentially utility maximizes whose level of satisfaction is
depend being reelected and who act in a manner that
maximizes the probability that this will in fact take place.
An immediate implication of this approach is that majority
of the public will be served by public decision makers who
enact legislation to maximize their chances of remaining in
office.
195
The political economy of trade policy-2
• The social objectives approach
Trade policy is conducted taking into account the wellbeing of different groups in society along with various
national and international objects. In this environment,
trade policy is promoted to the public at large in terms of
broader social goals such as income distribution, increased
productivity, economic growth, national defense, global
power and leadership, and international equity.
196
The political economy of trade policy-3
• An overview of the political science take on trade
policy
From an international relations perspective, it has been
tempting for political scientists to focus on the role of chief
executive of a country in influencing not only national
security but also policy relating to trade. However, this
“unitary actor ” approach has been criticized for ignoring
the micro foundations of policy formulation that underlie
the process by which various pressure groups influence the
setting of the policy.
197
The political economy of trade policy-4
• Baldwin’s integrative frame for analyzing trade
policy
It is built around four major sets of actors: individual
citizens, common-interest groups, the domestic
government, and foreign governments/international
organizations. The domestic government would be viewed
as the key actor because it ultimately sets policy.
198
A review of U.S. trade policy-1
•
Reciprocal trade agreements and early GATT rounds
The long process of tariff reduction began with the passage by
Congress of the Reciprocal Trade Agreements Act of 1934. This act
authorized the executive branch to engage in bilateral negotiations
with individual trading partners on tariff reductions.
•
The Kennedy Round of trade negotiations
To put new life into the trade negotiation process and to avoid
being shut up by te newly forming European Economic Community,
the United States led the way into a new round of negotiations from
1962 to 1967.
199
A review of U.S. trade policy-2
•
The Tokyo Round of trade negotiations
A new impetus for the new round was that, while tariff rates had
been moving downward, NTBs had been rising and had offset some
of the benefits of the tariff reduction.
•
The Uruguay Round of trade negotiations
Major objectives of this new round included a continuation of the
attempt to reduce NTBs, an enlargement of the negotiations to
embrace trade in services in addition to the traditional emphasis on
trade in goods, and a determination to deal with restrictions on
agricultural trade.
200
A review of U.S. trade policy-3
•
Trade policy issues after the Uruguay Round
Many countries wish to attain further relaxation of trade-restriction
measures in agriculture and services, to reduce remaining tariff
further, and to consider a variety of other matters pertaining to areas
such as antidumping procedures, procedures with WTO, and
intellectual property rights.
Further, there was a desire by developed countries----but decided
not by developing countries---to discuss the broad general area
known as “labor standards”.
In addition, and again mainly by developed countries, there was
pressure to include considerations of the environmental impact of
trade.
201
A review of U.S. trade policy-4
• The Doha Development
Agenda
Promises were made to reduce trade barriers further,
including those in the agricultural sector. A particular focus of
trade liberalization was to be on making clearer and stricter
the rules for imposing antidumping duties.
Several of plans for this round were of considerable potential
benefit to developing counties, such as the intent to give
developing countries cheaper access to pharmaceuticals.
202
A review of U.S. trade policy-5
• Recent U.S. Action
United States has, in recent years, been negotiating bilateral
and regional trade agreements. As far back as 1985, a U.S.Israel free trade agreement went into effect. In addition, free
trade agreement with 10 countries went into effect from
2001-2007, and agreements had been negotiated and talks
were underway with still others. Finally, a phenomenon that
has caught the attention of American public in the last few
years is the phenomenon of outsourcing.
203
Concluding observations on
trade policy-1
• The conduct of trade policy
A rules-based trade policy is one that
adheres to commonly accepted international
guidelines and codes of behavior on trade.
A results-based trade policy stresses that
policy should seek, through aggressive ,
unilateral action or threat of action, to achieve
the objectives.
204
Concluding observations on
trade policy-2
• Empirical work on political economy
In general, a survey of various empirical
tests for the U.S. indicated that a statistically
significant positive relationship exits between
the degree of industry protection and the
number of workers in the industry , and so
on.
205
Summery
This chapter examined political economy
influence, such as interest group and social
concern, on trade policy, and considered related
empirical work in the context of the U.S.. This
was accompanied by a review of U.S. trade
policy which highlight the long-run trend of
liberalization of trade, first through bilateral and
the through multilateral negotiation.
206
ECONOMIC INTEGRATION
CHAPTER 17
Learning objectives
• To understand the differences between the
•
•
•
four basic levels of economic integration.
To identify the static and dynamic effects of
economic integration.
To grasp the real-world impact of economic
integration on countries in the European
Union and the North America Free Trade
Agreement.
To increase awareness of current economic
integration efforts in the world.
208
Introduction
• What precisely is economic integration?
What are the benefits that cause all
these nations to want to join an
economic union? Are there costs
involved?
• In this chapter, we discuss several
different types of economic integration,
present a framework for analyzing the
welfare impacts of these special
relationships, and examine recent
economic integration efforts in the world.
209
Types of economic integration -1
• Free Trade Area
All members of the group remove tariffs on each
other’s products, while at the same time each member
retains its independence in establishing trading policies
with nonmembers.
This scheme is usually assumed to apply to all
products between member countries, but it can clearly
involve a mix of free trade in some products and
preferential, but still protected, treatment in others.
210
Types of economic integration -2
• Customs Union
All tariffs are removed between members and the
group adopts a common external commercial policy
toward nonmembers. Further more, the group acts as
one body in the negotiation of all trade agreements
with nonmembers. The existence of the common
external tariff takes away the possibility of
transshipment by nonmembers.
211
Types of economic integration -3
• Common Market
All tariffs are removed between members, a common
external trade policy is adopted for nonmembers, and all
barriers to factor movements among the member
countries are removed. The free movement of labor and
capital between members represents a higher level of
economic integration and, at the same time, a further
reduction in national control of the individual economy.
212
Types of economic integration -4
•
Economic Union
Includes all features of a common markets but also
implies the unification of economic institutions and the
coordination of economic policy though out all member
countries. While separate political entities are still present, an
economic policy union generally establishes several
supranational institutions whose decisions are binding upon
all members. When an economic union adopts a common
currency, it has become a monetary union as well.
213
The static and dynamic effects of
economic integration
• Static effects of economic integration
• General conclusions on trade
creation/diversion
• Dynamic effects of economic
integration
• Summery of economic integration
214
The European Union
• History and structure
• Growth and disappointments
• Completing the internal market
• Prospects
215
Economic disintegration and transition
in central and eastern European and
the former Soviet Union
• Council for Mutual Economic Assistance
It was began in 1949 to promote economic
cooperation among the member countries as a
Soviet counterpart to Marshall Plan.
• Moving toward Market Economy
The challenges for these transition economies
of moving into the world trading system begin
with the need for a generally acceptable and
convertible currency. The issue of products
quality is also a major concern.
216
North American Economic Integration
• Greater Integration
NAFTA eliminates tariff among the three
member countries over a 15-year period and at
the same time substantially reduces nontariff
barriers.
NAFTA was the first regional agreement among
counties with such diverse income levels.
• Worries over NAFTA
Estimates of the employment varied.
The precise size of other impacts of NAFTA is
also questionable.
217
Other major economic integration
efforts
• MERCOSUR
• CAFTA-DR
• FTAA
• Chilean Trade Agreements
• APEC
218
Summery
• This chapter examined the theory
behind the formation of various types
of Economic Integration.
• When a discriminatory trade policy
regime of this sort is induced, trade is
created through displacement of highcost domestic producers by lower-cost
partner supplier.
• This chapter also gave attention to the
EU, NAFTA, and other projects like
CEMA ,and so on .
219
INTEGRATIONAL TRADE
AND THE DEVELOPING
COUNTRIES
CHAPTER 18
Learning objectives
• To become familiar with the various
•
•
•
characteristics of developing countries.
To learn how great openness to trade can
potentially contribute to more rapid economic
growth.
To understand the problems of export
instability and terms-of-trade deterioration
faced by developing countries.
To comprehend the nature of and potential
solutions to the external debt problems of
developing countries.
221
Introduction
• How might the changing economic
conditions described in this vignette be
related to international trade and
finance?
• The purpose of this chapter is to
explore these relationships.
222
An overview of developing countries-1
• A closer look at the least developing countries
Kirchbach(2001) identified four accepted stylized facts
about international trade relations of the least developed
countries that do not necessarily reflects current realities:
1. Trade/GDP rations are low in the least developed countries.
2. All least developed countries export primary commodities.
3. All least developed countries suffer from marginalization
from global trade flows, and this tendency is inexorably
increasing.
4. All least developed countries have closed trade regimes.
223
An overview of developing countries-2
• The ratio of trade to GDP
According to 1997-1998 data, exports and imports of
goods and services constituted an average of 43 percent of
their GDP. This average level of trade integration for the least
developed countries was around the same as the world
average and actually higher than that of higher-income OECD
countries.
• Primary commodity exports
For the least developed countries as a group, unprocessed
primary commodities constituted 62% of total merchandise
exports and processed primary commodities made up a
further 8% of merchandise exports.
224
An overview of developing countries-3
• Marginal from global trade flows
The concept of marginalization is based on a fear
that globalization result in a greater concentration of
international trade and investment flows and that the
benefits accrue to only a small number of countries.
• Closed trade regimes
There is some evidence that suggests that least
developed countries have gone further in dismantling
trade barriers than other developing countries.
• Trade liberation, growth, and poverty
The lack of trade liberalization has also been called
into question.
225
The role of trade in fostering
economic development-1
• The static effects of trade on economic
development
If there is a difference between internal
relative prices in autarky and those can be
obtained internationally, then a country can
improve its well-being by specializing in and
exporting relatively less expensive domestic
goods and importing goods that are relatively
more expensive.
226
The role of trade in fostering
economic development-2
• The dynamic effects of trade on
economic development
Because conditions in the developing
countries differ so dramatically from
theoretical world of perfect competition and
full employment utilized in many theoretical
models, the static application of comparative
advantage may not be very helpful in
providing guidelines for trade and specialized
in dynamic LDC setting.
227
The role of trade in fostering
economic development-3
• Export instability
Whether the focus is on prices or on
earnings, however, the variability is regarded
as a problem because, with the relatively
high degree of openness of many developing
countries, variability in export sector is often
associated with variability in GDP and the
domestic price level.
228
The role of trade in fostering
economic development-4
• Potential causes of export instability
All three reasons are associated with the
fact that many developing countries are
relatively more engaged in the export of
primary products than manufactured goods.
The first two reasons pertain to price
variability, while the third reason focuses on
total export earnings variation.
229
The role of trade in fostering
economic development-3
• Long-run terms-of-trade deterioration
1. Differing income elasticity of demand
2. Unequal market power
3. Technical change
4. Multinational corporations and transfer
pricing
230
Trade, Economic growth, and Development:
the empirical evidence-1
• International export quota agreement
A type of agreement exemplified historically
by the international Coffee Agreement and, less
rigidly, by the Association of Coffee producing
countries, which operated from 1993-2002.
• Compensatory financing
An international agency is provided with
funding and forecasts the growth trend of the
export earnings of each participating LDC.
231
Trade, Economic growth, and Development:
the empirical evidence -2
• In sum, while empirical analysis often supports
the idea of a positive connection between the
expansion of international trade and growth in
income.
• The manner and degree to which trade
influences growth and development is complex
and often country specific. The nature of the
effect appears to vary with the degree of
development, the nature of the economic
system, and world market conditions outside
the influence of the individual country.
232
Trade policy and the developing
countries-1
• Policies to stabilize export prices or earnings
1. International buffer stock agreement
2. International export quota agreement
3. compensatory financing
• Problems with international commodity
agreements
From the standing point of the feasibility, the crucial
feathers for success in a buffer stock agreement are
the level at which the ceiling price and the floor price
are set.
233
Trade policy and the developing
countries-2
• Suggested polices to combat a long-run
deterioration in the terms of trade
1. Export diversification
2. Export cartels
3. Import and export restrictions
4. Economic integration projects
• Inward-looking vs. outward-looking trade
strategies
It is an attempt to withdraw, at least in the short
run, from the full participation in the world economy.
This strategy emphasize import substitution, that is ,
the production of goods at home that would otherwise
be imported.
234
The external debt problem of the
developing countries-1
• Causes of the developing countries’ debt
problem
1. oil shock
2. recession in the IC in the 1970s and early to
mid-1980s
3. real interest rate
4. primary-product prices
5. domestic policies
6. capital flight
7. loan-pushing by banks in DC
235
The external debt problem of the
developing countries-2
•Possible solutions to the debt
problem
1. changing domestic policies
2. debt rescheduling
3. debt relief
4. debt equity swaps
236
Summery
• The LDC in the world economy are characterized
•
by relatively low levels of per capita income, a
relatively high concentration of exports of primary
products, and export instability; they may also
face long-run forces that cause a deterioration in
their commodity terms of trade.
Along with trade problems, many DC face
problems with serving and repayment of external
debt. Recent steps have begun to emphasize
some elements of debt forgiveness to reduce the
potential burden of debt upon the growth process.
237
T h a n k
y o u